Regional Cooperation in Developing Asian Bond Market

Mr. Masato Miyachi, Senior Advisor

Office of Regional Economic Integration

Asian Development Bank

25 September 2007 Shanghai, PRC

Outline

• • • • Why Asian Bond Market Development Emerging Regionalism Regional Cooperation Initiatives in Developing Asian Bond Market • EMEAP • • • ABMI APEC ADC ADB’s role in regional bond market development

Why Asian Bond Market Development?

Asian bond markets can:



Reduce the double mismatch problem (currency and maturity)

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Reduce over-dependence on bank borrowing and diversifying financial risks

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Provide alternative sources of financing private and public investment.

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Provide alternative mode of wealth holdings for Asian households

3

Emerging Regionalism

Then Now

Asian savings invested abroad and channeled back to region Bank centered financial intermediation Financial sector dev. more focused on national efforts Use savings for productive investment within the region Capital market development part. bond market Enhance regional cooperation 4

Policy Initiatives for Efficient Regional Bond Market

    Remove policy distortions that affect efficient allocation of savings Enhance market infrastructure Establish bench-mark yield curves Strengthen regulation and supervision of financial sector – international accounting & disclosure standards 5

Regional Initiatives Bond Market Development

• • •  Executives’ Meeting of East Asia Pacific Central Banks (EMEAP) ASEAN+3 Asian Bond Market Initiative (ABMI) Asia Pacific Economic Cooperation (APEC) Asia-Cooperation Dialogue 6

Regional Initiatives Bond Market Development

• Executives’ Meeting of East Asia Pacific Central Banks (EMEAP) • • Strengthen demand side of bond market development Establish Asian Bond Fund (ABF1 and ABF2) 7

Regional Initiatives Bond Market Development

• ASEAN+3 Finance Ministers Meeting • • Strengthen supply side of bond market development Asian Bond Market Initiative (ABMI) 8

Regional Initiatives Bond Market Development

• Asia Pacific Economic Cooperation (APEC) Finance Ministers’ Meeting • • Study measures to promote regional bond market development Study securitization, credit guarantee mechanisms and new instruments 9

Regional Initiatives Bond Market Development

• Asia-Cooperation Dialogue • • Improve public awareness of the various initiatives Secure political support 10

ADB’s Regional Cooperation & Integration Strategy (RCI)

   

ADB Regional Cooperation Policy adopted in 1994 Regional cooperation is a relevant means for economic and social development Support to regional cooperation is a longstanding responsibility of the Bank



ADB charter mandates the bank to play an active role in regional “cooperation” in the

Asia-Pacific.

RCI strategy established in July 2006.

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Rationale and Imperatives for RCI

Emerging Trends in Regional Economic Integration  Globalization and interconnectivity  The Asian financial crisis revealed the high degree of financial integration in East Asia and created initial conditions for greater monetary and financial cooperation among the ASEAN and ASEAN+3 countries.

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Logic of RCI

 Market-driven economic integration requires cooperation  Regional cooperation can accelerate regional integration  RCI provides greater opportunities to unlock Asia Pacific’s vast economic potentials, and significantly contributes to economic growth, development and poverty reduction.

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ADB’s Mission and the Role of RCI

O V E R A C H I N G M I S S I O N / O B J E C T I V E POVERTY REDUCTION Regional Cooperation and Integration Individual Country Programs CORE AREAS OF INTERVENTION Pro-Poor Sustainable Economic Growth Inclusive Social Development Good Governance FOUR PILLARS OF RCI Regional & Subregional Economic Cooperation Trade and Investment Cooperation and Integration Monetary & Financial Cooperation & Integration Regional Public Goods

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The RCI strategy has four pillars:

Regional and Sub-regional Economic Cooperation Trade and Investment Cooperation and Integration

•

Cross-border Infrastructure

•

Physical Connectivity

•

Hardware and Software

•

Trade and investment expansion

•

Regional trade arrangements

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Regulatory coordination Monetary and Financial Cooperation and Integration

•

Financial market development and integration

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Regional macroeconomic and financial stability

•

Exchange Rates Regional Public Goods

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Clean energy and environmental protection

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Communicable disease control and natural disaster response

•

Good governance for transnational crime prevention (Human and drug trafficking; money laundering, and corruption )

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Pillar 3: Monetary and Financial Cooperation and Integration

• • • • Interdependence of financial markets Regional financial stability is key to global financial stability Advanced initiatives on policy dialogue, reserve pooling (Chiang Mai Initiative) and regional bond market development (Asian Bond Market Initiative) Importance of exchange rate stability 16

 RCI Strategy Promote “open regionalism”  ADB approach to RCI will be a multi-track, multi-speed approach.

  Different regions and subregions would embrace RCI at different paces. Even within a region or a subregion, the pace of progress would be different on different aspects of RCI and across countries.

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Office of Regional Economic Integration (OREI) • Established in 2005 • Serves as ADB’s focal point for RCI activities • Assists ADB in pursuing an open and outward-looking regionalism in Asia and the Pacific.

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OREI’s Principles • • • Client-orientation Relevance, responsiveness and result orientation.

Complementarity 19

RCI Approach

RCI adopts a multi-track, multi-speed approach.

• • Different regions and sub-regions would embrace RCI at different paces. Even within a region or a sub-region, the pace of progress would be different on different aspects of RCI and across countries. 20

• • • • • • • •

OREI’s Key Functions

Promote regional economic policy dialogue Support capacity building and institutional strengthening Conduct research on RCI Serve as knowledge and information center on RCI Develop partnerships with global stakeholders Acts a focal point for regional bond market development for the bank Support other ADB departments 21

• • •

ADB ’ s Role in Regional Bond Market Development

Stimulating market activities by issuing prime name credit papers.

Providing technical and research assistance to the Working Groups (WG) and the Focal Group of the ABMI; Promoting transparency/information disseminaion

ADB LCY Bonds

• • ADB papers in local currency • • Samurai bonds in the 70s Recently issued local currency bonds in Malaysia (2006), Thailand (2005), PRC (2005) and the Philippines (2006 ADB medium term notes (MTN) 23

ASEAN+3 Asian Bond Market Initiative (ABMI)

• • •

Initiative endorsed by the ASEAN+3 Finance Ministers Meeting in August 2003 in Manila, Philippines. ABMI aims to develop efficient and liquid bond markets in the ASEAN+3 Region.

Participation of countries in the initiatives is on a voluntary basis .

1.

2.

ABMI Focal Areas

Facilitate access to market via wider variety of bond issues in Asia Enhance market infrastructure for bonds

•Guarantee Mechanism •New Bond Products •Credit Rating Systems

Market Infrastructure:

•Information Dissemination •Settlements •Policy Dialogues among members • Legal and Institutional Infrastructure

Issuers:

Asian Governments Government Financial Inst.

Multilateral Development Banks Government Agencies Private Companies

Financial Products

Bonds Asset Backed Securities Local Currency Denominated Bonds Possibly Currency Basket Bonds

Investors

Domestic Regional International Institutional Retail 25

1.

2.

ABMI Focal Areas

Facilitate access to market via wider variety of bond issues in Asia Enhance market infrastructure for bonds Working Group 1

New Securitized Debt Instruments

Working Group 2

Credit Guarantee and Investment Mechanisms

Working Group 3

FOREX Transactions & Settlement Issues

Working Group 4

Rating Systems

Working Group 1 – New securitized debt instruments

• Study on “The ASEAN+3 Regional Multi Currency Bond” (Phase I) was completed in September 2005. Regional governments need to encourage trading in regional currency bonds and derivatives to have more flexibility in managing their currency trends and interest rates The study recommends: • • • • Early but gradual lifting of holding and transfer regulations for both local and foreign currency securities; Improvements in monitoring programs and shift to risk-based rather than quantitative regulation of financial prudence for institutional investors; More active development of risk-management tools; Complete liberalization of domestic links with global custodial systems 27

Working Group 1 – New securitized debt instruments

(2) • • Phase 2 Study on “The ASEAN+3 Regional Basket Currency Bonds (RBCB)” to be completed by the 3 rd Quarter of 2007. The study covers: • • • Merits and impediments of RBCB including efficiency frontier Market assessment and market view of RBCB Scope and limitations of RBCB, potential issuers and investors • • Recommended RBCB products Recommendations to ASEAN+3 governments for enabling environment for RBCB products 28

• • • • • •

Working Group 1 – New securitized debt instruments

(3) New Study on (i) Exploring New Debt Instruments for Infrastructure Financing (ii) Promotion of Securitization of Loan Credits and Receivables (iii) Promotion of Asian Medium Term Note Programme will start from 3 rd quarter 2007.

Next step: “Investing in Asian Bonds Conference 2007” • • • • Co-hosts: MOF, Thailand, MOF, Japan Date/Venue: 2 nd November 2007, in Tokyo Language: English and Japanese (with simultaneous interpretation) Audience: maximum 500 pax 29

•

Working Group 2 – Regional Guarantee Mechanism

Study on “ASEAN+3 Guarantee and Investment Mechanisms” (Phase 1) commenced in December 2003 and draft completed in February 2006.

• A Phase 2 study was started in January 2007 and draft interim report to be completed by September 2007. The 3 options of Credit Guarantee and Investment Mechanisms will be narrowed down to 1 by the Deputy’s Meeting in November 2007 30

Working Group 2 – Regional Guarantee Mechanism

• Phase 2 study will be done in two parts (Part A and Part B): • Phase 2-A will thoroughly assess the three options identified in the previous study, Phase 1 • Phase 2-B will create a business model and plan that will include operational and investment policy, product mix, demand prospects, financial projections and analysis, capital structure, and draft implementation plan.

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Working Group 3 – Foreign Exchange Transactions and Settlement Issues

  

Completed Phase 1 : “Bond Market Settlement and Emerging Linkages in Selected ASEAN+3 Countries” June 2005. Phase 2 Study on “Minimizing Foreign Exchange Settlement Risk in the ASEAN+3 Region” is being finalized and expected to be completed in 3rd quarter 2007.

The Study: - Reviews various risks especially FX settlement risks in cross border clearing and settlement systems.

- Presents options including assessment of each option to reduce FX settlement risks arising from cross border bond transactions.

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Working Group 3 – Foreign Exchange Transactions and Settlement Issues

•

ADB organized the “Asia Bond Clearing and Settlement Conference 2007” in April 2007 in Singapore.

• • 20 speakers and 150 participants from 16 countries of the region, Europe and US Discussed the future direction for bond clearing and settlement in the region and setting up a group of experts to move this initiative further 33

Working Group 4 – Rating Agencies

• • Facilitation of policy discussion and provision of technical expertise for enhancing credibility and visibility of domestic credit rating agencies (DCRAs) New technical assistance to start January 2007 will: • • • Enhance technical competency and institutional capacity of selected DCRAs in Asia Monitor and report on status of regulatory frameworks for DCRA operations in selected countries Enhance comparability and harmonization of credit rating standards among DCRAs in the region 34

Ad Hoc Support Team for Focal Group (ASTFG)

• • Study on European experience on Eurobond market development to identify the issues and basic requisites for the establishment of the “Asian Bond Norms and Standards”. Draft was completed in March 2006. New Study on “ASEAN+3 Harmonizing and Standardizing Asian Bond Conventions and Norms” has been approved for funding. Study to start 1 st quarter of 2007.

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Improving transparency/ information dissemination

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Asian Bonds Online Website (http://asianbondsonline.adb.org)

• Launched on May 15, 2004, a one-stop information site on ASEAN+3 bond markets.

• Completed studies of working groups can be downloaded from this site. • 2,000 visitor sessions per day (average Q1 2007).

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Asian Bond Monitor

• A Bi-annual (April and November) publication (5 issues published).

• Latest publication April 2007 issue downloadable at ABO

Asian Bonds Online

What makes Asian Bonds Online unique?

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Free Access

•offers free access to leading bond market indicators comparable across the ASEAN+3 economies.

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Updated Government Policies and Regulations

•provides information on current market activities, the legal and regulatory frameworks of each market and monitors government policies and initiatives affecting the industry. The flow and structure of the information are provided uniformly for each market. 

How to Buy Bonds

•is the only website providing investors the step-by-step mechanics of buying and trading government and corporate debt securities covering the entire ASEAN+3 economies.



Asian Bond Glossary

•provides the Asian Bonds Glossary as a tool to understand terms and acronyms unique to the region, or to specific East Asian bond markets. Definitions of Islamic sharia principles are included for Brunei Darussalam, Indonesia, and Malaysia.

Thank you

For More Information Mr. Masato Miyachi, Senior Advisor Office of Regional Economic Integration (OREI) [email protected]

+63-2-632-6832